Government should consider impact of quantitative easing on pension savers, MPs say

In its report into March's Budget, the Treasury Committee said that the Government's "loose monetary policy", involving both quantitative easing and low interest rates, had had "redistributional effects" which particularly penalised savers and those with 'drawdown' pensions. It called for "a more detailed assessment" of the effects of the policy on savers.

"Under this policy, savers receive a far lower return on their savings than under more normal conditions," the report explained. "Meanwhile the returns that new pensioners will receive on their annuities have also been badly affected."

"We recommend that the Government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing, and if appropriate consult on them at the time of the Autumn Statement," it concluded.

The Bank of England announced in February that it planned to increase its QE programme by £50 billion before the summer, taking the total investment by the Bank's Monetary Policy Committee (MPC) to £125 billion since October - and to £325bn overall. It had also held the rate of interest the Bank of England charges other banks to lend money to them at 0.5% since March 2009.

QE allows the Bank of England to inject money directly into the economy by buying assets from private sector institutions such as insurance companies, pension firms, banks or other companies and crediting the seller's bank account. This means the seller has more money to spend or invest, while the seller's bank has more money 'on reserve' to lend to other customers.

The majority of the extra money has been used to buy government securities, known as gilts, pushing up their prices – which results in the 'yield', or return, on those gilts falling as a percentage of the price.

QE also drives down annuity rates, which are rates at which a pension fund or part of a pension fund can be converted into a regular income under a special policy which can be purchased from an insurance company.

Final salary and other defined benefit pension schemes, which are schemes that promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment, are particularly affected by QE because they invest heavily in gilts. Lower gilt yields and long-term interest rates affect a formula known as the 'discount rate' which is used by the scheme actuary to calculate the cost of providing all the benefits currently promised during the scheme's regular valuations.

Last month, industry body the National Association of Pension Funds (NAPF) published a report indicating that final salary pension funds had dropped in value by a further £90 billion since the Government's second wave of QE began last October. It explained that change in how scheme values are calculated creates the appearance of a deficit, which a pension fund's sponsoring employer is legally obliged to fill.

In oral evidence to the Committee Paul Tucker, Deputy Governor of the Bank of England, defended its policy, saying that "savers would be hugely worse off" if the MPC had not taken action.

"I know, of course, that we have pulled down the discount rate and the rate of interest paid on deposit accounts is low," he said in his testimony, quoted in the Committee's report. "I understand and have great sympathy for the effect of that on savers, because many of them did nothing to bring about this dreadful crisis, but I promise you they would be even worse off had we not supported demand to the extent that we have."

"QE is intended to boost the economy," said pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com. "The question is whether the price paid for that boost by savers, and pension savers in particular, has been too high. This doesn’t mean that QE shouldn’t have happened. Instead, should measures be taken to help out savers?  Supporting savers sounds like a great idea, but how this is to be implemented is far from clear.”

The NAPF report also criticised the number of Budget announcements that appeared in the national press before the Chancellor delivered his speech. It warned the Government to "review its practices" for preserving Budget confidentiality in the context of a coalition Government.

"Coalition Government is not a justification for Budget leaks," it said. Information about measures intended for the Budget on which public or professional views needed to be sought should be "publicly released by the Treasury in the normal way and, as appropriate, accompanied by a written or oral parliamentary Statement".

The Committee also announced a further inquiry into the sweeping new "powers of direction" that will be granted to the Bank of England as part of a review of financial services regulation in the UK. A new Financial Policy Committee (FPC) within the Bank is being created to address so-called 'macro-prudential' issues that may threaten the UK's economic and financial stability. The Committee has called for greater accountability from the Bank given the "potential impact on millions of people" of these powers.